“In the animal kingdom, the rule is eat or be eaten; in the human kingdom, define or be defined.”
If 2012 has driven you right batty, I highly recommend reading the Classical Liberal work of the late psychologist, Thomas Szasz. Particularly in our profession, you have to be proactive in defining your process.
Make no mistake, on #OldWall there was a big business in being perma. There were Perma-Bulls and Perma-Bears. Now, on #WallSt2.0, there are Perma-Risk Managers who understand risk isn’t “on or off.”
Risk is always on. And it moves both up and down, fast.
Back to the Global Macro Grind…
In the animal kingdom (Canadian Junior Hockey), I learned the rule of taking a punch square in the face, fast. In the human kingdom (Wall Street), I’m re-learning the rules every day. Define your process, and evolve it as the game does. The rules are always changing.
In the last week, I hope I’ve been crystal clear in both communicating and acting on what our Global Macro Process has been signaling on global growth. To review 2012:
- #GrowthAccelerating = our call until January 24th when Bernanke imposed his Policy To Inflate (JAN25)
- #GrowthSlowing = our call starting in late-Feb, early March as food and oil prices ripped consumers, globally
- #GrowthStabilizing = mid-Nov to early-Dec, as commodity deflation takes hold, consumption stabilizes
I use hash-tags on #Twitter to hold myself accountable to the #TimeStamps implied by both our Research and Risk Management views. If you follow the Perma-Bull and Perma-Bear guys closely, you’ll notice that they are constantly changing their thesis.
Top down, our Global Macro Process has 3 big factors (our GIP model):
The aforementioned shifts in GROWTH are happening faster right now because that’s what Big Government Intervention does:
A) It shortens economic cycles
B) It amplifies market volatilities
All the while, Keynesian government policy makers are trying their very best to ramp #2 (asset INFLATION) via #3 (POLICY to inflate via currency devaluation).
Japanese bureaucrats are so impressed by what Bernanke appeared to have achieved at the September 2012 highs (3% higher in the SP500 at 1474, where inflation slowed growth), that they just convinced their people to burn their currency at the stake. For that, the Nikkei is +14.6% in the last month, but real (inflation adjusted) Japanese growth is slowing.
If POLICY makers of the Keynesian Kingdom want to really get this party started, they should go full Krugman/Chavez on these markets. Then Perma-Bulls will really be right for all the wrong reasons (after torching their currency, Venezuela’s stock market is up +305% YTD).
Back to the process, the asset allocation, net exposure, and sector moves we have made in the last month are as follows:
- We’re net short commodities and commodity related equities
- We’re net long consumption and consumer related companies profiting from commodity deflation
- We cut out asset allocation to Fixed Income to 0% on Friday
To be clear, before I rile up pension funds, this is how I think about asset allocation with my own money. Since I can (and often do) go to cash, I have no problem selling something down to 0% if I think the asset class and/or security has a rising probability of a draw-down.
Always remember Rule #1 – don’t lose money (Buffett, pre being politicized).
From a Risk Management Process perspective, this is where my multi-duration signals play a huge role. When something signals bearish TRADE and TREND (like US Treasury Bond Yields did last week), and the Global Macro Research Process confirms it, I sell.
I also buy things when they are immediate-term TRADE oversold (bought AAPL $502.50 yesterday), but that’s a different risk management strategy, on a shorter-term duration. Our longer-term risk management decision was to sell APPL on September 28th.
In a profession where I see less and less people who actually know what it is that they do, I think there is a tremendous opportunity for all of us to evolve and attempt to explain what it is that we do. People want to trust us – and we don’t need animals eating us.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now, $1, $105.95-108.94, $3.64-3.71, $79.36-79.99, $1.29-1.31, 1.69-1.80%, $501-532, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on December 04, 2012 for Hedgeye subscribers.
“It is seldom that liberty of any kind is lost all at once.”
If alarm bells aren’t going off in your head this holiday season, they should be. Don’t confuse our 2012 Global Macro call for #GrowthSlowing as regressive. Being a realist is progressive. So is standing on the front lines of change.
While he had a tough time marketing his progressive free-market ideas in the 1930s and 1940s, Hayek’s lessons lived on. The aforementioned quote from Hume stands like a rock alongside one from de Tocqueville at the beginning of The Road To Serfdom. Hayek addressed his book “to socialists of all parties.”
I’m not suggesting you become a hard core Hayekian. Neither am I telling you what and/or how to think. I am just a man in a room. I’m fighting for free-market liberties like many men and women who have come before me. During this generational debate about debt, spending, and taxes, all that we ask is that you educate yourself. Liberty’s Bells are ringing.
Back to the Global Macro Grind…
After another Monday morning littered with Greek bailout headlines, Global Equities backed off their early morning highs and closed on their lows (SP500 -0.5%). Across durations in our risk management model, Risk Ranges are getting pretty tight.
Tight can be trade-able. That’s a good thing. In Hedgeye-speak we are always talking to clients about managing the Risk Range. Once you have a repeatable process to calculate it, it’s trivial. Risk Ranges are at the bottom of the Early Look note, every day.
Risk Ranges provide us with a quantitative, probability-weighted, framework to contextualize the storytelling in the marketplace. Most stories are qualitative in nature, so having some math wrapped around what’s happening out there is helpful.
We tell stories too. We call them our Hedgeye Global Macro Quarterly Themes. For Q4, they remain as follows:
2. Bubble#3 (Commodities)
For accountability purposes, I use the hash-tag to provide you an archive of high-frequency macro data on Twitter. Being early doesn’t always make us right – but it will make you think outside the government’s centrally planned box.
While the #KeynesianCliff is annoying you, here’s an update on what used to matter to markets (#EarningsSlowing):
- For Q4 2012 so far, 78 companies have issued negative EPS guidance (29 companies have issued positive EPS guidance)
- That means 73% (78 out of 107) of the companies that have said something, said something negative, on the margin
- 73% = 2nd highest percentage of companies issuing negative EPS guidance since FactSet began tracking the data in Q1 2006
Per the lynx-eyed (and some say exotic) Darius Dale, I guess the perma-bulls would say that only 73% of companies guiding down is bullish! Relative to the worst quarter on recent record, that is (i.e. the one just reported with Q3 of 2012 = 74%).
I know, I know – since very few bulls called for both global and earnings growth to slow in Q1, blame everyone and everything but the forecasters in 2012. It’s all the government’s fault. So what we really need to do now is beg for more government.
Or do we?
The best thing that can happen to both the US and Global Consumption economy is more of Theme #2. Popping Bernanke’s Bubbles in food and energy prices would be wildly stimulative to the 71% (that’s US Consumption as a % of total US GDP).
Get consumption right, you’ll get global growth right.
That’s why I got bullish in 2009. That’s why I was bullish until January 25th of 2012 (until Bernanke decided to move 0% rates out to 2014 with more Policy To Inflate asset prices). Inflation is not growth.
“We are now so conditioned by permanent price inflation that the idea of prices falling every year is difficult to grasp. And, yet, prices generally fell every year from the beginning of the Industrial Revolution in the latter part of the eighteenth century until 1940, with the exception of periods of major war when governments inflated the money supply radically and drove up prices.” -Rothbard
The only war I see now is between the #PoliticalClass and the rest of us.
At tomorrow’s NYC Analyst Day one of the greatest innovators in America will be talking up asset price deflation in commodities. The Brooklyn born grinder (Starbucks CEO, Howard Schultz) knows how to make a buck and then hire someone with it. Now he’s staring down a futures price in coffee that’s down 50% since topping in May (see Chart of The Day).
That may not be the kind of change you are hearing from Marxist price controllers and debt/deficit spending Keynesians. That’s simply called the Fed getting out of the way for a few months. Cheers to that. Liberty’s Bells are ringing.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1704-1727, $109.42-111.76, $3.54-3.66, $79.59-80.27, $1.29-1.31, 1.58-1.67%, and 1404-1419, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Takeaway: Keith’s multi-factor, multi-duration model produced another winning trade in Apple stock.
We don’t believe there is a single authority on Apple (AAPL) or its stock price, but we do believe that you can risk manage a trade in Apple. That’s exactly what Hedgeye CEO Keith McCullough did today in our Real-Time Alerts, and it’s our Trade of the Day.
Here’s what happened: Keith’s models flashed an immediate-term oversold signal, and he bought AAPL at 10:27am today at $502.50, just above the low of the day when the stock briefly traded below $500 for the first time in ten months. The stock fell in part because of another downgrade by a sell-side analyst. However, AAPL rallied to close the day at $518.83, thanks in part to word that the company’s IPhone 5 sales in China topped two million handsets.
Keith’s trading record in AAPL is stellar due to his multi-factor, multi-duration model that manages risk in real-time. Keith sold AAPL on September 28 at $677.74, just ten days after the stock broached the $700 level.
Takeaway: The objectives introduced in China’s Central Economic Work Conference are in line with previous POLICY objectives and our outlook for China.
- The confluence of the POLICY objectives per the latest Central Economic Work Conference are in full support of our long-held core thesis on the Chinese economy – specifically that Chinese real GDP growth is no longer going to outperform CCP targets by 200-400bps; rather, Chinese GROWTH will come in sustainably slower at +7-8% per annum (the CCP target for 2013 is +7.5%).
- We’ve been in print confirming that Chinese GROWTH is no longer decelerating, but that any economic improvement over the intermediate-to-long term will be rather marginal and certainly nowhere near the area code of China’s trailing 5-10 year peak GROWTH rates.
- In light of this positive, but decidedly subdued outlook for the Chinese economy, we continue to hold bearish TAIL-duration biases on worldwide mining-related capex and international raw materials prices. Plainly stated, the slope of Chinese demand for raw materials is likely to remain flat-to-negative for the foreseeable future as China accelerates its economic rebalancing by siphoning marginal GDP dollars towards consumption in lieu of fixed capital formation.
- Sure, Chinese policymakers do indeed have a unique opportunity to accelerate urbanization and promote capital markets reform in order to sustain GROWTH, but sustaining GROWTH < demonstrably accelerating GROWTH. Don’t get ahead of your ski tips on this one!
Over the weekend, Chinese policymakers held their annual Central Economic Work Conference, which is used to finalize the country’s strategic macroeconomic objectives for the upcoming year. Below, we list what we thought were the key highlights of the largely uneventful event (per the State-owned Xinhua New Agency’s translation of the resulting statement):
- The key points from the conference include transforming the growth pattern through expanding domestic demand, eliminating imbalances in development through structural adjustments and achieving sustainable and stable social progress through reforms in key sectors. Leaders vowed to target “sustained and healthy development” as they maintain a “prudent” monetary policy and “proactive” fiscal stance.
- There was no mention of seeking “relatively fast” growth, a policy in place since 2006. It marks the first time that quality and efficiency, rather than speed, are center-staged in China's economic growth.
- New growth points should be created in domestic consumption, which will serve as both a strong pulling power and foundation for the sustained and healthy development of the country's economy.
- China will actively and steadily push forward urbanization next year, with a focus on improving quality of the efforts.
- China has reiterated its firm stance regarding property market controls and vowed to keep tightening measures in place, including bans on third-home purchases and property tax trials that have been introduced since 2010.
- China vowed to continue to protect foreign investors' rights and interests and their intellectual property rights.
- While encouraging and providing better guidance to private investors, the government will increase public investment on infrastructure projects that will not cause repetitive construction but set foundations for long-term development and benefit people's well-being.
All told, the confluence of the aforementioned POLICY objectives are in full support of our long-held core thesis on the Chinese economy – specifically that Chinese real GDP growth is no longer going to outperform CCP targets by 200-400bps; rather, Chinese GROWTH will come in sustainably slower at +7-8% per annum (the CCP target for 2013 is +7.5%).
Most importantly, the government’s resolve to maintain property market curbs amid a continuation of “prudent monetary policy” and “proactive fiscal policy” confirms our view that Chinese policymakers have no interest in reflating their credit-based economic bubble – which has been identified by them as the key contributor to heightened levels of social unrest. To that tune, it’s important to note that China’s Gini coefficient (a common measure of income inequality) ripped to 0.61 in the most recent year the data was available (2010); per China’s Survey and Research Center for China Household Finance, that level is 50% higher than a risk levels for social unrest. Mass incidents, including strikes, riots and other disturbances, doubled to at least 180,000 in 2010 from 2006 levels per Tsinghua University.
As repeatedly stressed in outgoing CCP General Secretary Hu Jintao’s transition speech, those atop the CCP brass are keenly aware of the political risks the Party faces from social discontent, so it’s prudent for investors to maintain muted expectations with regards to Chinese POLICY going forward. We’ve been in print confirming that Chinese GROWTH is no longer decelerating, but that any economic improvement over the intermediate-to-long term will be rather marginal and certainly nowhere near the area code of China’s trailing 5-10 year peak GROWTH rates.
In light of this positive, but decidedly subdued outlook for the Chinese economy, we continue to hold bearish TAIL-duration biases on worldwide mining-related capex and international raw materials prices. Plainly stated, the slope of Chinese demand for raw materials is likely to remain flat-to-negative for the foreseeable future as China accelerates its economic rebalancing by siphoning marginal GDP dollars towards consumption in lieu of fixed capital formation. For more of our thoughts here, please refer to the following notes:
PONDERING CHINESE GROWTH PART II (7/17);
EARLY LOOK: River Baptisms (10/4);
HOPE VS. REALITY IN THE CHINESE PROPERTY MARKET (10/4); and
Sure, Chinese policymakers do indeed have a unique opportunity to accelerate urbanization and promote capital markets reform in order to sustain GROWTH, but sustaining GROWTH < demonstrably accelerating GROWTH. Don’t get ahead of your ski tips on this one because China will not be lining up to bail out the global economy (see: 2009-10’s CNY4 TRILLION stimulus package and CNY17.5 TRILLION credit expansion) this time around!
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